ONE STEP AHEAD

Private Equity and Hedge Funds After the Global Financial Crisis

Forbes.com “Law of the Market” blogger Spangler (The Law of Private Investment Funds, 2012, etc.) looks at hedge and private equity funds, which he believes will continue to have a function going forward.

The author brings his legal expertise to bear on the many questions surrounding the structures of hedge and equity funds. Aware of ever-louder criticism and divided opinions, Spangler seeks to counter the “many misconceptions and biases” in the mainstream media. He believes that there is a function for financial organizations committed to pursuing higher returns for their investors by taking on higher risks. Hedge funds and private equity funds fill that slot. The author also looks at the darker side of the issue. Hedge funds, he shows, are now shored up by deposits from public pension plans, which chase the higher returns meant for their investors. Spangler reports that “many observers inexperienced with alternative funds are often quite surprised” to learn that many states are entrusting their retirement funds to these financial highfliers. Of course, other investors include those with enough income and assets to “fend for themselves,” and regulators have turned their attention in that direction as well—e.g., the investors caught in Bernie Madoff's pyramid scam. Spangler discusses how hedge and equity funds are created and the processes by which their managers are empowered and protected from liability, while ensuring that their fees are paid. He also examines the tax advantages of the structures, especially the benefits of moving assets offshore. According to the author, President Barack Obama's proposals to change these types of tax breaks can be compared “to Hitler's 1939 invasion of Poland.” Ultimately, whether such funds really outperform others remains unclear.

An informative examination of a niche market facing significant change.